Use the following information for questions 1 and 2:A company receives $500 of cash as an additional investment in the company by its owner, Mary Smith. The company's Cash account is increased and Mary Smith, Capital is increased.

1.

Should the $500 entry to the Cash account be a debit?

Yes

Right!

Cash is always debited when cash is received.

No

Wrong.

Remember that whenever cash is received, the Cash account is DEBITED. Also remember that we debit asset accounts (other than contra asset accounts) in order to increase their normal debit balance.

2.

Should the $500 entry to Mary Smith, Capital be a debit?

Yes

Wrong.

The owner's equity account, Mary Smith, Capital, should be CREDITED. There are two reasons for this. One reason is that the Cash account was debited (because the company received cash). Therefore, the other part of the transaction needs to be a credit.

The second reason is that the normal balance for Mary Smith, Capital is a credit balance and to increase its balance, we need to CREDIT the account. Recall that the owner equity account, Mary Smith, Capital is on the right side or credit side of the accounting equation and therefore its balance is normally a credit balance.

No

Right!

This owner's equity account should be credited, not debited.

Use the following information for questions 3 through 6:A company using the accrual method of accounting performed services on account in August. The services were for $2,000 and the company gave the customer credit terms that state the amount is to be paid to the company in September.

3.

Assuming that the company prepares monthly income statements, what will be the account debited for $2,000 in August?

Cash

Wrong.

The correct answer is Accounts Receivable. The words 'on account' and 'credit terms' indicate that cash was not received.

Accounts Receivable

Right!

The account Accounts Receivable should be debited in August. Accounts Receivable, an asset, was increased in August.

Service Revenue

Wrong.

The account to be debited is Accounts Receivable. The account Service Revenue should be CREDITED in August. It is very rare that any revenue account would be debited.

4.

Which account should the company credit for $2,000 in August?

Cash

Wrong.

No cash was involved in August. Further, cash is credited when a company PAYS cash.

Accounts Receivable

Wrong.

You should have DEBITED Accounts Receivable in August. A credit to Accounts Receivable would reduce the account balance, which is not the case in August.

Service Revenue

Right!

You should credit revenues when they are earned.

5.

In September when the company receives the $2,000 from the customer, which account should the company debit?

Cash

Right!

We always debit Cash when cash is received.

Accounts Receivable

Wrong.

The correct answer is to debit Cash, since cash was received. Accounts Receivable should be CREDITED, since this asset is reduced when the company collects on its accounts receivable. (A debit to Accounts Receivable or any asset will increase the account balance.)

Service Revenue

Wrong.

There is no revenue in September. The revenue was earned and recognized in August. Further the Service Revenue account is almost always CREDITED—rarely debited.

6.

In September when the company receives the $2,000 from the customer, which account should the company credit?

Cash

Wrong.

When cash is received the Cash account would be DEBITED, not credited.

Accounts Receivable

Right!

When an asset such as Accounts Receivable is decreased, you credit the account.

Service Revenue

Wrong.

Service Revenue was credited in August when the service was performed. You cannot recognize revenue twice for the same service. In September the company is merely collecting an accounts receivable. This means the credit should be to Accounts Receivable.

7. To increase the balance in the following accounts, would you debit the account or would you credit the account?

Accounts Payable

Debit

Wrong.

Accounts Payable is a liability account. Liability accounts have credit balances and to increase the balance you need to CREDIT the account.

Credit

Right!

To increase a liability you credit the liability account.

Cash

Debit

Right!

Cash and other assets are debited to increase their balances.

Credit

Wrong.

A credit will DECREASE the Cash account (or any asset account) balance.

Land

Debit

Right!

Since land is an asset, you debit the account to increase its balance.

Credit

Wrong.

The correct answer is debit. Since land is an asset, you need to DEBIT the Land account to increase its balance.

Notes Payable

Debit

Wrong.

Since Notes Payable is a liability account, you need to CREDIT the account to increase it.

Credit

Right!

As with any liability account, you credit the account to increase its balance.

Accounts Receivable

Debit

Right!

Accounts Receivable is an asset and a debit will increase an asset account.

Credit

Wrong.

A credit will DECREASE an asset such as Accounts Receivable. To increase Accounts Receivable you need to debit the account.

Mary Smith, Capital

Debit

Wrong.

Mary Smith, Capital is an owner equity account and its normal balance is a credit balance. Therefore to increase the account you need to CREDIT it.

Credit

Right!

Mary Smith, Capital is an owner equity account with a normal balance of credit. Hence you credit the account to increase its balance.

Supplies

Debit

Right!

Supplies is an asset account. Asset accounts normally have debit balances and are debited to increase their balances.

Credit

Wrong.

Supplies is an asset account. Asset accounts normally have debit balances and are debited to increase their balances.

Supplies Expense

Debit

Right!

Supplies Expense should be debited. Except for special situations (correcting entries, closing entries, and some adjusting entries) expenses are always debited.

Credit

Wrong.

Supplies Expense should be debited. Except for special situations (correcting entries, closing entries, and some adjusting entries) expenses are always debited.

Prepaid Insurance

Debit

Right!

Prepaid Insurance is an asset and assets are increased with a debit.

Credit

Wrong.

Prepaid Insurance is an asset and assets are increased with a DEBIT. When you prepay insurance you pay cash. This means the entry will have to CREDIT Cash. That in turn means you will need to DEBIT an account—and the account is Prepaid Insurance.

Service Revenue

Debit

Wrong.

Revenue accounts are almost always CREDITED. The exceptions are: correcting, closing, and some adjusting entries. Think of performing a service for cash. You would debit Cash because you received cash and you would need to credit an account, because of double entry. Since you are earning the money by performing the service, you should credit a revenue account. Revenues also have the effect of increasing owner's equity, which normally has a credit balance.

Credit

Right!

Revenue accounts are almost always CREDITED. (The exceptions are: correcting, closing, and some adjusting entries.) Revenues have the effect of increasing owner's equity, so it is reasonable for revenues to have a credit balance.

Mary Smith, Drawing

Debit

Right!

The drawing account normally has a debit balance and should be debited when the owner withdraws assets from the business for personal use. You can also visualize the journal entry. When the owner draws money out of the business, the business will CREDIT Cash. That means the other account involved will have to be debited. Mary Smith, Drawing is a contra owner's equity account.

Credit

Wrong.

The drawing account normally has a debit balance and should be debited when the owner withdraws assets from the business for personal use. You can also visualize the journal entry. When the owner draws money out of the business, the business will CREDIT Cash. That means the other account involved will have to be debited. Mary Smith, Drawing is a contra owner's equity account.

Equipment

Debit

Right!

Equipment is an asset and should be debited to increase the account balance.

Credit

Wrong.

A credit will decrease an asset account balance. To increase an asset account balance you need to debit the account.

Unearned Revenue

Debit

Wrong.

Unearned Revenue is a liability account. A debit will decrease a liability account. You want to credit a liability account in order to increase it.

Credit

Right!

Since Unearned Revenue is a liability account, a credit will increase its balance.

8. To decrease the balance in the following accounts, would you debit the account or would you credit the account?

Accounts Payable

Debit

Right!

Accounts Payable is a liability account. To decrease a liability account you debit the account.

Credit

Wrong.

Accounts Payable is a liability account. Liability accounts have credit balances and to decrease the balance you need to DEBIT the account. (If you were to pay off a liability, you would have to credit Cash, so the entry to the liability account would have to be a debit.)

Cash

Debit

Wrong.

A debit will INCREASE the Cash account (or any asset account) balance. A CREDIT will decrease the Cash account.

Credit

Right!

A credit will decrease the Cash account (or any asset account) balance.

Land

Debit

Wrong.

The correct answer is credit. Since land is an asset, you need to CREDIT the Land account to decrease its balance.

Credit

Right!

Since land is an asset, you credit the Land account to decrease its balance.

Notes Payable

Debit

Right!

As with any liability account, you debit the Notes Payable account to decrease its balance.

Credit

Wrong.

Since Notes Payable is a liability account with its normal credit balance, a DEBIT is needed to decrease the account balance.

Accounts Receivable

Debit

Wrong.

Accounts Receivable is an asset and a CREDIT is needed to decrease its normal debit balance.

Credit

Right!

A credit will decrease an asset such as Accounts Receivable.

Mary Smith, Capital

Debit

Right!

Mary Smith, Capital is an owner equity account with a normal balance of credit. Hence you debit the account to decrease its balance.

Credit

Wrong.

Mary Smith, Capital is an owner equity account with a normal balance of credit. If you credit the account you are increasing its balance. A DEBIT will decrease balance.

Supplies

Debit

Wrong.

Supplies is an asset account. Asset accounts normally have debit balances and a debit will increase asset balances. You should CREDIT an asset to reduce an asset's balance.

Credit

Right!

Since Supplies is an asset account, it will be reduced by a credit.

Supplies Expense

Debit

Wrong.

A debit will INCREASE Supplies Expense. It is very unusual that previous expenses already recorded in an expense account will be decreased. However, a CREDIT will reduce the normal debit balances of expenses.

Credit

Right!

It is very unusual that previous expenses already recorded in an expense account will be decreased. However, a credit will reduce the normal debit balances of expenses.

Prepaid Insurance

Debit

Wrong.

Prepaid Insurance is an asset and to decrease an asset you need to CREDIT the account.

Credit

Right!

Prepaid Insurance is an asset and will be reduced with a credit.

Service Revenue

Debit

Right!

Because revenue accounts have credit balances, you are correct to indicate that a debit will reduce the balance.

Credit

Wrong.

Revenue accounts have credit balances, so crediting a revenue account will INCREASE the balance.

Mary Smith, Drawing

Debit

Wrong.

A debit to the drawing account will increase (not decrease) the balance in Mary Smith, Drawing. (Since this drawing account is a contra owner's equity account, the debit will cause the owner's equity to decrease. However, the debit causes the drawing account balance to increase.) To DECREASE the balance in the drawing account, you will need to CREDIT the account.

Credit

Right!

Because Mary Smith, Drawing is a contra owner equity account with a debit balance, you are correct to indicate a credit is needed to reduce the balance.

Equipment

Debit

Wrong.

Equipment is an asset and a debit will increase the account balance. You would have to CREDIT Equipment in order to reduce its balance.

Credit

Right!

A credit will decrease this asset's account balance.

Unearned Revenue

Debit

Right!

Unearned Revenue is a liability account and its balance will be decreased with a debit.

Credit

Wrong.

Since Unearned Revenue is a liability account, you need to DEBIT this account in order to decrease its balance.

9. What is the normal balance for the following accounts?

Accounts Payable

Debit

Wrong.

Accounts Payable is a liability account. Liability accounts have CREDIT balances. Liabilities are on the right hand or credit side of the accounting equation.

Credit

Right!

Liability accounts normally have credit balances.

Cash

Debit

Right!

Cash and other assets have debit balances.

Credit

Wrong.

Cash and other assets have DEBIT balances. Assets are on the left or debit side of the accounting equation.

Land

Debit

Right!

Since Land is an asset, its normal balance is a debit balance.

Credit

Wrong.

The correct answer is debit. Since Land is an asset, its normal balance is a DEBIT balance.

Notes Payable

Debit

Wrong.

Since Notes Payable is a liability account, its balance is normally a CREDIT balance.

Credit

Right!

Liability accounts normally have credit balances.

Accounts Receivable

Debit

Right!

Accounts Receivable is an asset. Therefore its normal balance is a debit balance.

Credit

Wrong.

Accounts Receivable is an asset. Therefore its normal balance is a DEBIT balance.

Mary Smith, Capital

Debit

Wrong.

Mary Smith, Capital is an owner equity account and its normal balance is a CREDIT balance.

Credit

Right!

Mary Smith, Capital is an owner equity account with a normal balance of credit.

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